1. Joint-ProcessCosting Chapter 9

2. Joint processes • Process that converts a single input into multiple outputs

3. Joint processes • Split-off point • Input splits into two or more products • Intermediate product • Product that requires more processing before it can be sold • Final product • Product that is ready for sale

4. Joint processes • By-product • Minor product resulting from the process • Has some value, can be sold • Scrap • Not really a “product” • Has possible minor value • Recycling • Waste • No value • May incur cost to dispose of it

5. Joint processes • Joint cost • Cost to operate the process • Further processing cost • Cost incurred beyond the split-off point • Benefits a particular product • Sell as-is or process further? • incremental revenue vs. incremental cost

6. Allocation of joint costs • Once incurred, joint costs are sunk costs • Why allocate them to resulting products? • Inventory valuation • Contracts • Casualty loss estimation • Etc. • Performance measurement • Only allocated to main products

7. Allocation of joint costs • Allocation methods • Net realizable value method • Allocated proportionately to products based on their final sales value minus further processing costs, if any • Physical measures method • Allocated proportionately based on some physical measure of the products • Weight, volume, length, etc.

8. Joint cost allocation example • Himshey Chocolate Company produces bulk chocolate which can be sold as is, or processed into bars and “smooches” • Joint costs, including cocoa beans, milk, sugar, etc. are $1,200,000 to produce 1,000,000 pounds of chocolate

9. Joint cost allocation example • Output • 100,000 pounds of bulk chocolate • 600,000 pounds of bars • 300,000 pounds of “smooches” • 10,000 pounds of cocoa bean shells • Further processing costs and selling prices • Bulk chocolate: $5,000; $150,000 • Bars: $60,000; $800,000 • Smooches: $45,000; $900,000 • Shells: $500; $1,000

10. Joint cost allocation example • Net realizable value method

11. Joint cost allocation example • Physical measures method

12. Accounting for by-products • Minimal value, so accounting is not complex • Method 1: Treat NRV of by-product as other revenue • Method 2: Treat NRV of by-product as a reduction of the cost of the main products • Allocate the cost reduction on the same basis as was used to allocate joint costs

13. Accounting for scrap and waste • Scrap • NRV is usually negative • Disposal cost is usually greater than the sales value • NRV is an overhead cost or part of joint costs • If NRV is positive, treat as by-product • Waste • No sales value • Disposal cost is overhead or part of joint costs